MACD Histogram Trading Strategy

MACD Histogram Trading Strategy in 2024 (Rules, Setup, Backtest, Example)

The MACD-histogram trading strategy is a mean-reversion system that identifies momentum changes and reversal points in the stock market. The strategy has generated 6669 trades on a portfolio of 77 ETFs, with long positions better than short positions.

Lets jump right into it. Let’s test a MACD-histogram trading strategy.

This article looks at the MACD histogram. For a primer on this indicator please read this article:

I’m trading some strategies based on mean reversion on a sample of 77 ETFs. Those ETFs are the most liquid ones. One of the strategies I trade is based on MACD-Histogram.

It’s a popular indicator I have tweaked a little bit. On a per trade basis, this is one of the best strategies I have. I have tweaked this one a little bit to the following:

MACD histogram trading strategy (Trading Rules)

We describe the trading rules both in plain English and by using a chart:

Trading Rules

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Entry is on the close. The exit is on the first day when the close is higher than the day before. Here is an example (exit was on the close the day after because the ETF rose in price):

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MACD histogram trading strategy

For short it is vice versa. However, long is a lot better than short. In general, short is a lot more difficult to trade.

In total, this strategy has generated 6669 trades on my portfolio of 77 ETFs.

This diagram shows the average gain per trade since 2000. Among those 77 ETFs hardly any is negative:

MACD histogram trading strategy backtest

From month to month we get the following bar chart:

MACD histogram trading strategy trading rules

I think this is a pretty good result. Assuming one can only trade a maximum of ten positions at a time as a portfolio, we get this equity curve:

MACD histogram trading strategy setup and performance

This strategy is in cash most of the time! This strategy can be one of several if swing trading. This proves that a very simple strategy can be very efficient.

Conclusion:

The MACD-histogram trading strategy works pretty well as a mean-reversion system. You can probably make some twists to it and make it even better.

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Why is the MACD-histogram a popular indicator for traders?

The MACD-histogram is popular among traders because it helps identify changes in momentum and potential reversal points in the market.

What are the entry and exit points for the MACD-histogram strategy?

The entry point for this strategy is on the close, and the exit point is on the first day when the close is higher than the previous day’s close.

How does the MACD-histogram strategy perform with long and short positions?

The MACD-histogram strategy is more efficient with long positions, and short positions are generally more challenging to trade.

What is a MACD Histogram?

MACD Histogram is a visual representation of the difference between the MACD line and the signal line. It helps traders identify changes in momentum and potential trend reversals in financial markets.

How do you read a histogram on MACD?

To read a histogram on MACD (Moving Average Convergence Divergence), look at the bars. When bars are above the zero line, it indicates bullish momentum; when below, it indicates bearish momentum. The height of the bars shows the strength of the momentum.

What is the MACD histogram crossover strategy?

The MACD histogram crossover strategy is a trading technique that involves using the MACD histogram to identify potential changes in momentum. It triggers a buy signal when the histogram crosses above the zero line and a sell signal when it crosses below the zero line.

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